Reflecting on the Fed's decision to re-cycle some the proceeds from its portfolio back into the money supply by purchasing government bonds, I think there was perhaps no other choice but to do so. If the Fed had allowed these securities to mature through early payoff, the aggregate money supply would have decreased slightly. Given the ongoing difficulties in banking, any further reduction of the money supply would be a bad thing.
The recent actions by the Fed are certainly not bold in any way. The general consensus within the Fed and among private economists is that it is best to hold off any intervention efforts for a while. Given that the stimulus program has not achieved sustainable economic growth or a reduction in unemployment, it is probably best to do nothing and let the US economy heal itself. Further intervention will continue to distort important economic signals. This has already happened to a large extent in the housing industry where various government programs have had no effect whatsoever.
I am of the opinion that Sept. might prove to be a time of severe selling pressure for stocks because there is little if any strength in the US economy. By recent estimates, Q2 GDP growth will be around 1%. This is a big downshift from Q1. If a weak back-to-school and holiday selling season happens, growth for Q3 and Q4 will experience additional downward pressure. This sets things up or a poor start to 2011.
I think it is time to begin thinking about systemic and structural causes for the extremely slow recovery. These might represent long-term changes to the US economy and social structure that are hard to measure in current time. I will have more to write about this topic in future posts.
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